Working Paper: NBER ID: w2773
Authors: Nouriel Roubini
Abstract: This paper presents an infinite horizon model of consumption and taxation " smoothing" that implies a simple relation between current accounts, budget deficits, investment rates and transitory output shocks. It is argued that such a model could explain the "Feldstein-Horioka puzzle" of the apparent lack of international capital mobility. Traditional regressions of the savings rate on the investment rate, as performed in the literature, are shown to be incorrect tests of the hypothesis of capital mobility because they do not control for the independent role of budget deficits and temporary output shocks in the current account and savings equations. Empirical tests of the model for a sample of 18 OECD countries present good evidence that international capital markets are widely integrated and that the "Feldstein-Horioka puzzle" might be explained by the important role of fiscal deficits in the determination of the current account and the saving behavior.
Keywords: current account; budget deficits; international capital mobility; Feldstein-Horioka puzzle
JEL Codes: F32; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| budget deficits (H62) | current accounts (F32) |
| budget deficits (H62) | savings behavior (D14) |
| temporary positive shocks to output (E39) | current account surpluses (F32) |
| temporary negative shocks to output (E39) | current account deficits (F32) |
| budget deficits (H62) | misspecification in traditional current account equations (F32) |